OFTO Regime

UK’s new tender round expected to attract GBP 2 billion of investments

The UK’s Offshore Transmission System Owner (OFTO) regime to own and maintain offshore transmission assets through a competitive tender process has met with significant success, with the sector attracting GBP 1.5 billion worth of investments since its launch in 2009. Through the regime, the UK government aims to boost competition, thereby lowering asset costs and encouraging new entrants by offering them innovative solutions and funding options. Since its launch, the OFTO assets have attracted significant interest from the investor community by offering solid returns on a relatively low-risk profile, underwritten by a stable regulatory framework overseen by the energy regulator, the Office of Gas and Electricity Markets (Ofgem). The latest Tender Round 5 (TR5) launched by Ofgem on October 10, 2016 is another step in this direction.

OFTO regime 

The OFTO framework is being implemented in two stages. In the first stage, known as the transitional regime, OFTOs were selected for offshore links where transmission assets were already under construction or were to be constructed by the

offshore wind farm developer. The transitional regime applied to those projects that could achieve (or demonstrate that they would achieve) a prescribed stage of development by March 31, 2012. The second stage, the enduring regime, applied to all the other projects (that is, those that could not achieve a certain level of development by March 31, 2012 or where construction was yet to be initiated).

When originally envisaged, the enduring regime was to involve the selection of OFTOs to undertake the complete design, finance, ownership and management of the transmission infrastructure (OFTO-build model). But due to generator concerns regarding loss of control over critical transmission components, difficulties in coordinating development timelines, etc., the UK’s Department of Energy and Climate Change introduced the “generator-build” option. Now, under the enduring regime, offshore developers have the flexibility to choose whether they, or an OFTO, will design and construct the transmission assets. Regardless of whether it is the generator or the OFTO that constructs the offshore transmission assets, the OFTO will be responsible for the ownership and operation of the transmission asset.

In addition to the latest TR5, Ofgem has launched four rounds of offshore transmission tender competitions: Tender Round 1 (TR1), Tender Round 2 (TR2), Tender Round 3 (TR3) and Tender Round 4 (TR4).

TR1 and TR2 under the transitional regime

TR1 under the transitional regime was launched in November 2010. The competitive tender witnessed a strong market response during a period of significant financial market volatility and uncertainty due to the credit crunch. This round attracted GBP 120 million of project finance. The process also helped introduce new transmission service providers to the industry and tapped into a wider pool of international funds. The total risk was spread across the entire global transmission sector and not restricted to the few existing operators. Under TR1, OFTO licences were granted for nine projects – the 90 MW Barrow, the 500 MW Greater Gabbard, the 173 MW Gunfleet Sands 1, the 2,150 MW Ormonde, the 180 MW Robin Rigg East and West, the 315 MW Sheringham Shoal, the 300 MW Thanet, the 184 MW Walney 1 and the 184 MW Walney 2 projects (see table for licence status).

TR1 was followed by TR2 in March 2012. In this round, an OFTO licence was granted for the world’s largest operational wind farm, the 630 MW London Array. The other three OFTO projects that qualified for TR2 were the 574 MW Gwynt y Môr, the 270 MW Lincs and the 388 MW West of Duddon Sands projects (see table). This round of tenders saw investments of GBP 1,145 million for four OFTO projects. According to Ofgem, OFTOs for TR2 projects delivered even greater value for money for consumers than the previously completed TR1 projects.

Under these two rounds, the selected OFTOs were to finance the operations and maintenance of the offshore transmission asset post construction of the asset. In the transitional phase (involving TR1 and TR2), 13 OFTOs were selected. Transmission Capital Partners (a consortium of UK-based Transmission Investment LLP and the UK’s Amber Infrastructure Group) and Blue Transmission (a consortium of the UK’s 3i Group and Japan-based Mitsubishi Corporation’s UK subsidiary, Diamond UK Transmission Corporation Limited) were granted the maximum number of four licences each.

TR3, TR4 and TR5 under enduring regime

In February 2014, Ofgem launched TR3. This marked a key milestone for the offshore transmission regime as it was the first tender round under the enduring regime. The transmission assets of two offshore wind farms, the 205 MW Westermost Rough and the 220 MW Humber Gateway, were tendered during this round and attracted project finance worth GBP 346 million. TC Westermost Rough OFTO Limited, a consortium comprising Transmission Capital Partners Limited and International Public Partnerships Limited, was granted the OFTO licence for the 205 MW Westermost Rough project while the licence for the 220 MW Humber Gateway was won by Humber Gateway OFTO Limited, a consortium comprising UK-based infrastructure investors Balfour Beatty Investments Limited and Equitix Limited.

The fourth OFTO tender was floated in April 2016 to enable prospective bidders to compete for ownership of the transmission assets of the 258 MW Burbo Bank Extension Wind Farm. TR4, which aimed to attract funds of GBP 230 million, has been considered a bridge between TR3 and TR5, which comprise multiple large-scale projects. Further, this tender round introduced changes that were aimed at reducing the burden on bidders. For instance, the requirements of the enhanced pre-qualifications and invitation to tender payments were removed.

In September 2016, Ofgem shortlisted five bidders for the 258 MW Burbo Bank Extension project. These are the Balfour Beatty Equitix consortium (comprising Balfour Beatty Investments Limited and Equitix Limited), Dalmore Capital Limited, Diamond Transmission Partners (a consortium comprising Mitsubishi Corporation and HICL Infrastructure Company Limited), Mari Energy Transmission (a consortium comprising Macquarie Corporate Holdings Pty Limited and Frontier Power Limited) and Transmission Capital Partners (a consortium comprising International Public Partnerships Limited and Transmission Capital Partners Limited Partnership). The regulator is expected to announce the details of the preferred bidder in April 2017.

The proposed assets that will be transferred to the shortlisted OFTO include an offshore substation; a 24.3 km long, 220 kV offshore export cable; a 10.4 km long, 220 kV onshore export cable; a 400/220 kV onshore substation; 700 metres of 400 kV onshore export cable to connect the onshore substation with the existing National Grid Electricity Transmission plc (NGET) Bodelwyddan substation; a 400 kV gas-insulated switchgear (GIS) at the Bodelwyddan substation; and an OFTO supervisory control and data acquisition (SCADA) system.

TR5 was launched in October 2016. Under this, the shortlisted bidders will own and operate five proposed transmission links to offshore sites over a 20-year period. The five offshore wind farms are the 402 MW Dudgeon, the 340 MW Galloper, the 573 MW Race Bank, the 400 MW Rampion and the 660 MW Walney Extension farms. The five transmission links will have a total capacity of 2.3 GW. TR5 is expected to attract an investment of over GBP 2 billion. Further, given the number and timing of projects in TR5, the extended project quotations (EPQs) were grouped into two phases (EPQ1 and EPQ2). EPQ1 consists of three projects: Dudgeon, Race Bank and Rampion. The remaining two links – Galloper and Walney Extension – have been grouped under EPQ2.

The details of the transmission assets to be transferred under TR5 are:

  • Dudgeon Offshore Wind Farm: The transmission assets consist of an offshore substation, which will collect the power produced at the 402 MW offshore wind farm located 32 km off the coast of Cromer in North Norfolk to step up the voltage from 33 kV to 132 kV; two 132 kV offshore export cables (each 42 km long) and two 132 kV onshore export cables (each 47 km long); a new 400/132 kV onshore substation in Necton, Norfolk; and an OFTO SCADA system. The project is on schedule to complete the transmission assets by end-2016 and is expected to start power generation by the first quarter of 2017.
  • Galloper Offshore Wind Farm: The transmission assets for the 340 MW offshore wind farm located 27 km from the shore of Suffolk comprises an offshore substation, offshore and onshore export cables, and an onshore substation. The offshore substation, located within the turbine array of the offshore substation platform, comprises two 132/33/33 kV transformers and 132 kV switchgear. Two export cable circuits (with associated fibre optics), each comprising 45 km of submarine cable and 0.85 km of onshore cable, are connected at the Transition Joint Bay located near Sizewell Beach. The onshore substation is located near the existing Greater Gabbard substation in Leiston and is connected with the wind farm at 132 kV. In addition, two 0.28 km cable circuits that link the onshore substation to NGET’s existing 132 kV Leiston substation, two 132 kV GIS circuit breakers located within NGET’s Leiston substation at the OFTO/NGET interface points, and the OFTO SCADA system will be transferred to the OFTO. The transmission assets are expected to be commissioned by 2017 while the wind farm is scheduled to become operational in the first half of 2018.
  • Race Bank Offshore Wind Farm: The transmission assets for this project comprise two offshore substations; two 220 kV offshore export cables, each with a route length of approximately 71 km; two 220 kV onshore export cables, each with a route length of approximately 11.6 km; the 400 kV Race Bank (ROW01) onshore substation; two 400 kV cables of approximately 100 metres connecting the ROW01 substation to the existing NGET Walpole substation; and two 400 kV air-insulated switchgear (AIS) circuit breakers positioned within the NGET Walpole substation. It also includes a 220 kV subsea cable interlink between the two offshore substations with an approximate route length of 6.5 km and the OFTO SCADA system. Construction work on the transmission assets is expected to be completed by the third quarter of 2017.
  • Rampion Offshore Wind Farm: The transmission assets for the transfer of electricity from the 400 MW Rampion Wind Farm, located approximately 13 km from the Sussex coast in England, will comprise an offshore substation platform; two 17 km long, 150 kV three-core undersea offshore export cables; two sets of 27 km long, 150 kV onshore underground cables; a new onshore substation at Twineham; and two 400 kV cables connecting the new Twineham substation to the existing 400 kV NGET substation at Bolney. The transmission assets are expected to be commissioned by July 2017.
  • Walney Extension Offshore Wind Farm: The transmission assets for this project comprise two offshore substations; two 220 kV offshore export cables with route lengths of approximately 80 km and 67 km; two 220 kV onshore export cables each with a route length of approximately 4 km; the 400/220 kV Walney Extension (WOW03 and WOW04) onshore substation; two onshore 400 kV cables with an approximate length of 0.4 km connecting the WOW03 and WOW04 substation with the existing NGET Middleton substation; a 23 km long, 220 kV subsea interlink cable for connecting the two offshore substations; 400 kV GIS equipment at the Middleton substation; and an OFTO SCADA system. Construction and commissioning of the transmission assets is expected to be completed by 2017.

Under TR5, the tender process for three projects under EPQ1 began on October 10, 2016 and will continue till February 2017. The tender process for the remaining two links under EPQ2 is scheduled to start from February 2017 and end by June 2017.

The OFTO regime has helped lower asset costs and attract new players to the sector. The first three tender rounds have resulted in significant cost savings of around GBP 672 million to GBP 1,218 million when compared to plausible merchant and regulated counterfactuals that might have been applied in the absence of this competitive approach. Following suit, by providing an opportunity for investors to participate in the tendering for over GBP 2 billion of assets, TR5 is expected to ensure even higher returns for both investors and consumers.

GET ACCESS TO OUR ARTICLES

Enter your email address